Blog · 14 October 2026

Education Freedom Tax Credit (§25F): State Opt-In, SGO Lists and What US CPA Firms Should Tell Clients

By Keshav Bansal, CA

The Education Freedom Tax Credit under IRC §25F is a federal credit that only works in states that opt in—and South Carolina is already moving scholarship granting organizations (SGOs) onto its certified list for tax year 2027. Proposed regulations under IRS news release IR-2026-117 put the credit-versus-deduction distinction front and center for US CPA firms counseling clients who give to SGOs. This guide sticks to figures and dates as stated in those sources and in South Carolina Governor McMaster's Executive Order 2026-23, so you can brief partners before January 2027 contributions begin.

What §25F is—and why state opt-in matters

Per the lesson tied to IRC §25F, the Education Freedom Tax Credit is a federal credit that only works if your state opts in. Covered states are those where the governor elects into the program and the state submits a certified SGO list by January 1. Without that election and list, a gift that looks like a scholarship contribution may not qualify for the federal credit—even if the organization is well known locally.

That structure differs from many individual credits that apply nationwide once statutory tests are met. For CPA firms with multi-state clients, the first screening question is not "Did the client give to a school?" but "Is this client's state a covered state for the year at issue, and is the recipient on that state's certified SGO list?"

Credit vs deduction: why IR-2026-117's framing matters

IR-2026-117 announced proposed regulations for the Education Freedom Tax Credit. The practical teaching point from that release, as summarized in the October 13, 2026 digest, is simple: a credit cuts tax dollar for dollar, while a deduction only saves the taxpayer's marginal rate. Clients used to Schedule A charitable deductions will mis-price §25F if you do not reframe the conversation in credit terms.

That distinction also interacts with other credit planning your firm already tracks—for example, how refundable credits and draft Schedule 3-A change the shape of a refund versus how a nonrefundable credit only reduces tax to zero. Clients hear "tax break" and assume either a refund or a Schedule A line. §25F is neither of those by default.

Core mechanics (as stated for §25F)

Using only the figures and rules stated alongside the South Carolina coverage of §25F:

• 100% credit up to $1,700 per taxpayer. The credit is stated as a 100% credit, capped at $1,700 per taxpayer.
• Reduced by any state credit for the same gift. If the client also claims a state credit for the same contribution, the federal credit is reduced accordingly.
• No §170 charitable deduction for credited dollars. Dollars that generate the federal credit do not also get a charitable deduction under §170.
• Nonrefundable, with a 5-year carryforward. Unused credit does not create a refund; it can carry forward for five years.
• Taxable years ending after December 31, 2026. The applicability window stated with these rules is taxable years ending after December 31, 2026—so tax year 2027 planning for calendar-year individuals is the near-term focus.

Do not invent a higher married-filing-jointly cap or other dollar amounts from outside these sources. If your software or a later IRS publication shows different figures, follow current IRS guidance.

South Carolina as a worked example of a covered state

South Carolina opted in on January 13, 2026. On October 13, 2026, Governor McMaster issued Executive Order 2026-23, which directs the South Carolina Department of Revenue (SCDOR) to take applications from scholarship granting organizations that want to be on South Carolina's list for the federal Education Freedom Tax Credit for tax year 2027. Per the governor's announcement, SGO applications go to SGOapplication@dor.sc.gov.

For firms with South Carolina clients—or clients who give to South Carolina SGOs—the EO is an operational signal: the state is actively building the certified list that §25F requires. Before a client writes a check in early 2027, confirm the organization is (or will be) on that certified list for the year of the gift.

What US CPA firms should do before January 2027 contributions

• Map covered-state exposure. Flag clients in states that have elected in (South Carolina is the worked example here) and clients who donate across state lines to SGOs.
• Build an SGO checklist. For each planned gift: covered state? Certified SGO list for the contribution year? Any state credit claimed for the same gift? Documentation needed at filing?
• Rewrite the "charitable gift" talk track. Lead with credit vs deduction (IR-2026-117), then the no-§170 rule for credited dollars, then nonrefundable treatment and the 5-year carryforward so clients do not expect a larger refund.
• Coordinate state and federal returns. Because the federal credit is reduced by any state credit for the same gift, prepare both worksheets together.
• Watch the proposed regulations. IR-2026-117 put proposed regs on the table; final forms and list-publication mechanics may still move. Tie organizer questions to current IRS guidance rather than locking soft-dollar estimates into engagement letters.
• Mind timing relative to other fall deadlines. Many firms are still clearing October 15 extension work while starting 2027 planning. Put §25F on the post-extension calendar so it is not buried under 1099 follow-ups.

Counseling pitfalls to avoid

Assuming nationwide availability. §25F is structured around covered states (governor election + certified SGO list by January 1). A client in a non-covered state does not get the federal credit merely because news stories described a "nationwide" school-choice program.

Claiming §170 on credited dollars. The stated rule is clear: no §170 charitable deduction for the dollars that generate the credit. Organizers should ask whether the client intends to claim the federal credit so the deduction side is not accidentally doubled.

Treating it like a refundable credit. Nonrefundable with a 5-year carryforward means low-liability years may park unused credit for later—useful, but not the same as a cash refund.

Ignoring state-credit offsets. If the state offers its own credit for the same gift, the federal amount is reduced. Model both before the client gives.

When return information or donor data is shared with offshore or AI-assisted prep teams, keep your Section 7216 consent and Circular 230 process current so gift documentation does not leave the firm without proper authorization.

Where outsourced support fits

Year-end planning that mixes state opt-in lists, SGO certifications and credit-versus-deduction math adds review time on top of ordinary 1040 work. Extra capacity for document gathering, bookkeeping catch-up and return drafts does not replace the signing preparer's judgment on §25F eligibility, but it frees partners for the client calls that need it. If your firm wants help with bookkeeping, cleanup and tax prep support for US CPA firms, email info@taxbrewglobal.com.

Check current IRS guidance: this article summarizes sources as of 14 October 2026 (IR-2026-117; IRC §25F as stated in the notes linked above; South Carolina Executive Order 2026-23 / governor's October 13, 2026 announcement) and is general information, not tax advice. Proposed regulations, certified SGO lists and forms may change. Confirm against current IRS guidance, the Code, final regulations and the client's state revenue department before acting.